Third party confirmation requests: A new approach utilizing an expanded field;

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Third Party Confirmation Requests: A New Approach Utilizing an Expanded Field
Horton L. Sorkin*
University of Kansas
This study is concerned with modifying the confirmation format in such a way that the probability of an error being detected by an external party and then being reported to the auditor is increased. On the basis of five field studies of confirmation reliability, ". . . it is clear that the (confirmation) technique is far from perfect."1 The unreliability associated with confirmations results in part from the tendency of recipients of confirmation requests to agree with the information contained in the request even when the information is erroneous. In this study, this tendency is defined as Type II error or say yes behavior.
The main purpose of the study was directed at recipient error detection and reporting improvement, accomplished by restricting an external party's ability to concur with the information on a confirmation request when the audited organization's books are in error. If say yes behavior is decreased and the recipient responds to the auditor's request, the detection rate of errors in an entity's books should increase with the use of the confirmation format modifica­tion
that has been developed.
Importance of the Study
Since the auditor relies upon evidence to evaluate the accuracy of an entity's books, the auditor is necessarily concerned with the reliability of the evidence evaluated. The auditor is effective only if audit objectives are achieved. The auditor is efficient if the audit objectives are achieved with as little effort (cost) as possible. This study is concerned with the improvement of an auditing technique by increasing the reliability of the technique. If reliability can be increased, then the auditor will be able to perform the audit task more effectively and efficiently.2
* This paper is based on a 1976 study for which primary financial support was furnished
by the Peat, Marwick, Mitchell Foundation and Northwest Bancorporation and a 1977 study
for which primary funding came from Northwest Bancorporation. Both studies were also
supported by the Twin Cities Chapter of the Institute of Internal Auditors, the International
Institute of Internal Auditors, and the University of Minnesota. Individuals actively involved
include Michael J. Barrett and Jack Gray of the University of Minnesota, Roger Carolus,
Eugene Jackels, Charles Petry and, especially, Kenneth Meuwissen of Northwest Bancorpora­tion.
Virginia Sorkin's aid in data processing and analysis is acknowledged.
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